2013 (6) TMI 43 - HC - Income Tax

Loss on revaluation of security - nature of security held for a period of more than 10- 15 years - securities maintained as per RBI Guidelines - deduction u/s 80M in respect of net dividend income - held that - While 30% of the amount claimed as loss is allowed by the assessing authority itself and this amount is not in issue before us and therefore we have not opined anything on the same. The issue raised is on the rejection of the claim for deductions as a business loss in respect, of balance 70% and on the above examination, we find that the amount insofar as 70% of the investment is concerned, even as per the assessee it is held as permanent investment and may be because it is required to be held so by the assessee- Bank in terms of the instructions and guidelines issued by the RBI and to fulfil the statutory requirement under the RBI Act read with Banking Regulation Act. Assessing Officer has not merely recorded the finding of fact on this aspect, but also very correctly, as in our considered opinion, no assessee can claim an investment of lasting nature, to be part of its trading asset or as an asset held by way of stock-in-trade. While it is possible to convert any long term asset as part of a trading asset and the Income-tax Act also recognizes the same, it also deals with the consequences of such declaration. This is a clear case of investment in the securities, which cannot be characterized as stock-in-trade at all, as even as per the admission of the assessee and as per the relaxation, assuming it has any relevance, given by RBI, it can only be 30% of the investment which can be clothed with the character of stock-in-trade, as the assessee-bank had some freedom in exchanging such securities or any other form of security, it can be said that to this extent securities are available for sale, but the condition is that it again should be invested in any other security, so that requirement of investment in securities as per RBI guidelines/instructions is maintained by the bank. - Decided aganist the assessee.

Issues Involved:
1. Deduction of loss on revaluation of securities.
2. Classification of securities as capital assets.
3. Deduction of bad debts.
4. Deduction of entertainment expenditure.
5. Deduction under Section 80M for dividend income.

Detailed Analysis:

1. Deduction of Loss on Revaluation of Securities:
The Tribunal held that the loss of Rs. 1,09,10,252/- on revaluation of securities was an allowable deduction. The assessee, a banking company, claimed this loss based on the market value of securities on the last day of the financial year, arguing that these securities were stock-in-trade. The Assessing Officer, however, classified 70% of these securities as permanent investments based on RBI guidelines, allowing only 30% as current investments. The Tribunal reversed this decision, but the High Court upheld the Assessing Officer's classification, stating that permanent investments cannot be treated as stock-in-trade. Therefore, the Tribunal's decision was incorrect, and the High Court answered questions 1 and 2 in favor of the Revenue.

2. Classification of Securities as Capital Assets:
The Assessing Officer and CIT (Appeals) had classified 70% of the securities as permanent investments, which the Tribunal reversed. The High Court, however, supported the initial classification, stating that permanent investments cannot be reclassified as stock-in-trade. The High Court emphasized that the nature of the asset must be determined based on the facts of each case, not merely on RBI guidelines or the assessee's designation. Thus, the High Court upheld the classification of these securities as capital assets.

3. Deduction of Bad Debts:
The Tribunal allowed the assessee's full claim for bad debts, reversing the Assessing Officer's partial disallowance based on Section 36(1)(vii-a). The High Court remanded this issue to the Assessing Officer for re-examination in light of the Supreme Court's ruling in Catholic Syrian Bank Ltd. v. CIT, which clarified the application of Section 36(1)(vii) and 36(1)(vii-a). The High Court thus set aside the Tribunal's finding and required reassessment.

4. Deduction of Entertainment Expenditure:
The Tribunal allowed the assessee's claim for full deduction of entertainment expenditure incurred on employees accompanying guests, which the Assessing Officer had disallowed under Section 37(2). The High Court, however, held that such expenditure falls under the definition of "entertainment expenditure" as per Explanation 1 to Section 37(2), and thus the statutory limitation applies. Therefore, the High Court answered this question against the assessee.

5. Deduction under Section 80M for Dividend Income:
The Tribunal allowed the assessee's claim for deduction under Section 80M on the gross dividend income without deducting expenses. The High Court upheld this decision, stating that the Revenue did not demonstrate the actual expenditure incurred by the assessee for earning the dividend income. Therefore, the Tribunal's directive to allow the full deduction under Section 80M was justified, and the High Court answered this question in favor of the assessee.

Conclusion:
The High Court allowed the appeal in part, remanding the issue of bad debts for reassessment and upholding the Revenue's stance on the classification of securities and entertainment expenditure. The Tribunal's decision on the deduction under Section 80M was upheld in favor of the assessee.

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